The Autumn 2022 budget had a few surprises in store for both businesses and individuals; below we summarise the key announcements that will be most relevant for our clients.

Impact on businesses:

•  The planned increase in Corporation Tax rate from 19% to 25% for companies with over £250,000 in profits will come into effect in April 2023.

• Those companies with profits under £50,000 will continue to pay corporation tax at 19%. Those with profits between these two figures will pay 19% on the first £50,000 of profits and then be subject to a tapered rate on profits above that. The calculation behind this is quite complex but effectively profits in this tapered region will be subject to a marginal tax rate of 26.5%. See our example below for more details.

• The Employers NIC rate will reduce from 15.05% to 13.8% as previously planned. The NICs Secondary Threshold for employers will be maintained at £9,100 until April 2028.

• The VAT threshold of £85,000 will remain for an additional two years from April 2024.

• The Annual Investment Allowance of £1 million is set to be made permanent from 1 April 2023.

• There are some significant changes for SMEs who claim Research and Development tax reliefs:

  • Currently, SMEs can obtain additional tax relief equal to 130% of the R&D expenditure. From 1 April 2023 this will decrease to 86%.

  • Additionally, loss making companies can surrender losses for a R&D tax credit. The rate is being reduced from 14.5% to 10% from 1 April 2023.

Impact on individuals:

•  The Income Tax additional rate threshold at which tax is payable at 45% will decrease from £150,000 to £125,140 from 6 April 2023.

• The increase in dividends tax by 1.25% will remain. From 6 April 2022, basic rate dividends will attract tax at 8.75%, higher rate will attract 33.75% and additional rate, 39.35%. See example below for more details.

• Additionally, the dividends tax free allowance will reduce from £2,000 to £1,000 from April 2023. It will be further reduced to £500 from April 2024.

• The personal allowance is set to remain at £12,570 and the higher rate threshold at £50,270.

• The Capital Gains Tax Annual Exempt Amount is being reduced from £12,300 to £6,000 from April 2023 and then to £3,000 in April 2024.

• The reversal of the 1.25% NIC increase means that NIC will be charged at 12% on earnings up to £50,270 and 2% over this level.

• For the self-employed, Class 4 NIC will reduce from 10.25% and 3.25% to 9% and 2% from 6 April 2023. Class 2 NIC will increase to £3.45 per week.

• Currently, there is a benefit in kind charge on electric vehicles at 2%. This will remain until April 2025 when it will increase to 3% and by 1% thereafter each year.

• From April 2025, electric cars, vans and motorcycles will begin to pay road tax in the same way as petrol and diesel vehicles.

• The following changes made to Stamp Duty in September 2022 will remain in place until 31 March 2025:

  • Nil-rate threshold increased from £125,000 to £250,000 on residential property purchases.

  • Nil-rate threshold for first time buyers increased from £300,000 to £425,000 with the maximum purchase price raised from £500,000 to £625,000.

Corporation tax changes with an example profit of £100,000:

Current:

Profit = £100,000

Corporation tax at 19% = £19,000 (£100,000 x 19%)

Total Corporation tax = £19,000 (effective rate = 19%)

From April 2023:

Profit = £100,000

Corporation tax at 19% = £9,500 (£50,000 x 19%)

Corporation tax at 26.5% = £13,250 (£50,000 x 26.5%)

Total Corporation tax = £22,750 (effective rate = 22.75%)

Additional corporation tax of £3,750

The Effective rate at different profit levels is shown as follows:

• £50,000 – 19%

• £75,000 – 21.5%

• £100,000 – 22.75%

• £150,000 – 24%

• £200,000 – 24.63%

• £250,000 – 25%

Dividend tax changes with an example of £1,000 pre-tax profit:

This example does not factor in the dividend allowance changes.

2021/22 (assuming basic rate taxpayer):

Pre-tax profit = £1,000

Corporation tax at 19% = £190 (£1,000 x 19%)

Dividend = £810 (£1,000 - £190)

Dividend tax at 7.5% = £61

Total tax = £251 (£190 + £61)

Effective rate = 25.1% (£251 / £1,000)

From April 2023 (2023/24) on profits at marginal rate:

Pre-tax profit = £1,000

Corporation tax at 26.5% = £265 (£1,000 x 26.5%)

Dividend = £735 (£1,000 - £265)

Dividend tax at 8.75% = £64

Total tax = £329 (£265 + £64)

Effective rate = 32.9% (£329 / £1,000)

Additional overall tax of £78

The government’s response to rising energy prices and the predicted cost of living crisis presents us with an unprecedented change in tax policy. Here are some of the highlights:

• The 45% additional rate of income tax that relates to earnings over £150,000 was planned to be scrapped but has been reinstated as of today.

• The 1.25% health and social care levy will be reversed effective from 6 November 2022.

• The 1.25% increased tax rate for dividends will also be abolished from April 2023.

• The basic rate of income tax will be reduced from 20% to 19% from April 2023.

• The cost of gas and electricity has been capped and should be £2,500 per year if you are an “average household”. This does not mean that it will be capped at £2,500, if you use more, you will pay more.

• Those using alternative heating fuels will receive £100 in financial support.

• The stamp duty threshold has risen from £125,000 to £250,000.

• For first time buyers, the threshold for stamp duty will increase from £300,000 to £425,000 and the maximum value of the property which this relief can be applied to also increases from £500,000 to £625,000.

• Alcohol duty has been frozen.

• Previous IR35 reforms have been revoked meaning that from 6 April 2023 the determination of employment status for contractors lies with the individual again.

• Corporation tax for limited companies planned increase has been scrapped and so will remain at 19%.

• The Annual Investment Allowance for plant and machinery will remain at £1 million.

• The Energy Bill Relief Scheme (EBRS) will temporarily protect businesses and other non-domestic energy users for up to 6 months with a review after 3 months.

Business

• Corporation tax remains at 19%.

• Entrepreneurs' relief will be retained, but the lifetime allowance will be reduced from £10 million to £1 million.

• VAT on the sale of digital publications such as e-books, e-magazines & academic journals will be cut from to 20% to 0% from 1 December 2020.

• R&D tax credit relief to increase from 12% to 13%.

• Employment allowance for small businesses to increase from £3,000 to £4,000 from April 2020.

• The business rates for premises with a rateable value below £51,000 for businesses in the retail, hospitality & leisure industries will be 100% discounted for 12 months starting from 1 April 2020.

• Employees who claim a fixed cost for working from home will be able to claim £6 per week from 6th April 2020 - this is up from £4 per week.

• IR35 changes will go ahead as planned.

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Personal tax

• The point that employees national insurance kicks in will rise from £8,632 to £9,500, this will save individuals just over £100 a year. However, the point that employers start paying national insurance remains the same.

• From 1st January 2021, women’s sanitary products will be reduced from to 20% to 0%.

• The capital gains tax allowance will rise from £12,000 to £12,300 from April 2020.

• Individuals with income below £200,000 will not see their annual pensions allowance being tapered away - this threshold was previously £110,000.

• Additional 2% stamp duty on non-UK residents purchasing residential property from April 2021.

• Reliefs on the sale of residential properties (lettings relief and principal private residence relief) have been reduced significantly. From April 2020, landlords who sell their property may face a higher tax bill.

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Coronavirus

• Statutory sick pay will be paid to all those who choose to self-isolate from day 1, even if they don't have symptoms.

• Firms with fewer than 250 staff will be refunded for sick pay payments for two weeks.

• A new “time to pay” helpline has been established so that taxpayers can discuss instalment arrangements for payment of their tax liabilities.

• Small firms will be able to access "business interruption" loans of up to £1.2 million.

The way you send HMRC VAT information is changing

HMRC are changing how businesses need to keep their VAT records and submit their VAT returns - this is known as Making Tax Digital (MTD). All VAT registered businesses must use the service if they have a taxable turnover of, or above, the UK VAT registration threshold (currently (£85,000).

To use this service you will need to keep your VAT records digitally and submit VAT returns using software that works with MTD - we recommend Xero and FreeAgent. You will need to do this for your first VAT return for the period starting on or after 01Apr19. The date that you need to register & submit VAT Returns via MTD compliant software is determined by your VAT stagger, for example:

VAT Period MTD Deadline

01Apr19 – 30Jun19 07Aug19

01May19 – 31Jul19 07Sep19

01Jun19 – 31Aug19 07Oct19

Important

Once you have joined the service you will no longer be able to use the existing VAT system to submit your returns. So you need to make sure that you have software that works with Making Tax Digital before signing up. Click here for a list of our recommended MTD compliant software.

Once you are ready to join Making Tax Digital, click here.

If your employer pays you less than 45p per mile for business mileage in your personal car you’ll probably be able to claim a tax refund.

An example of how it works

If you receive 15p per mile from your employer and travelled 5,000 business miles in your personal car (i.e. not a company car) during the tax year, you will have received 5,000 x 15p = £750 in expenses.

However, HMRC's recommended rate of reimbursement is 45p per mile for the first 10,000 miles (and 25p per mile thereafter) and so you are able to claim the difference between the two rates as an expense against your salary.

It effectively reduces your salary by the difference, which in this case would be (45p - 15p) x 5,000 miles = £1,500.

If you were a basic rate tax payer you would be able to claim £1,500 x 20% = £300 back in tax and if you were a higher rate tax payer you would be able to claim £1,500 x 40% = £600 back in tax.

What to do next

If you are not registered for self-assessment...

If the difference between the mileage received from your employer and HMRC's recommended reimbursement is less than £2,500 then a claim can be made by simply filling out a P87 Form.

The difference in the example above is £1,500 and so a P87 Form would be the correct course of action.

If the difference is over £2,500, you will need to fill out a self-assessment tax return. In order to register for self assessment you will need to fill out an SA1 form.

Once you have completed the registration form it will take up to 6 weeks to process. You will then receive a letter from HMRC with your UTR number on it and you will then be able to submit your Tax Return online.

If you are registered for self-assessment...

You will need to make the mileage claim on your self-assessment tax return. You can also adjust and resubmit a prior year tax return. 

If you want to claim for years prior to that then you will need to write to HMRC and include details of your calculations. The address to write to is as follows:-

Self Assessment
HM Revenue & Customs
BX9 1AS

I would also suggest including your national insurance number and/or UTR number (10 digit number found on your self-assessment tax return) as a reference.

We are able to assist with any of the above- just get in touch with us at info@millwardmay.co.uk

The spring budget delivered by Philip Hammond was unusually light with only 28 measures. However, a few of the changes will have a significant impact on many taxpayers. The government is clearly trying to deal with what they perceive as tax imbalances between employees and those who are self-employed or operate Limited Companies. Given that the country is £1.7 trillion in debt (which works out at c. £62k per family!), we can expect more tax hikes in future. The key headlines were:

Increase in Personal allowance for individuals and the basic rate tax limit

This is good news for all taxpayers as the government announced that from April 2017, the personal allowance will increase by £500 to £11,500 and the basic rate band by £1,500 to £33,500.

As an example, if you have annual earnings of £45,000, you would previously have paid £7,200 in income tax. This would reduce to £6,700 from April 2017, saving £500 in tax.

National insurance for self-employed individuals

Currently self-employed individuals will pay Class 4 NICs on profits between £8,060 and £43,000 at a rate of 9% and 2% on profits in excess of £43,000. The maximum payable at 9% is therefore £3,144.60.

From April 2017, the 9% will apply to profits between £8,164 and £45,000. The maximum payable at 9% is therefore £3,315.24.

From April 2018, Class 4 NIC will increase by 1% to 10%. From April 2019, it will then increase by a further 1% to 11%. So based on the current bands, the maximum payable at 10%/11% will increase to £3,683.60 and £4,051.96 respectively.

Class 2 NICs will be abolished as previously announced. On average, individuals will see an increase to their annual NICs by approximately £240 per year.

Dividend allowance

Currently taxpayers receive a £5,000 tax-free dividend allowance. After this, dividends at the basic rate are taxed at 7.5%, 32.5% in the higher rate and 38.1% in the additional rate.

From April 2018, this allowance will reduce to £2,000 which is aimed at director shareholders operating and extracting funds through a Limited company.

This will result in additional tax of £225 for those taking annual dividends of £5,000 or more.

As a reminder, here are the key changes which will be applied from April 2017 (some announced in previous budgets):

Personal tax changes from April 2017:

• ISA allowance will rise by £4,760 to £20,000
• Personal allowance will increase by £500 to £11,500
• The threshold for paying higher rate tax will increase by £2,000 to £45,000
• The Lisa (Lifetime ISA) is launched with a saving limit of £4,000 per year, the government topping up with a 25% bonus i.e. £1,000.
• Buy-to-let mortgage interest rate relief is phased out starting with only 75% relief in 2017.
• Two new annual allowances of £1,000 for trading and property income.

Company tax changes from April 2017:

• Corporation tax rates will drop by 1% to 19%
• New category for limited cost traders on the VAT flat rate scheme takes effect with a flat rate of 16.5%. If total spend on “relevant goods” for the period is less than either £250 or 2% of gross sales then the 16.5% rate must be adopted. This is seen as another measure to reduce the benefit contractors get when working through Limited Companies.

There are two options available to you; you can either claim on a mileage basis or a costs basis.

Mileage

The simplest way of calculating a business car expense is to record your business mileage during the year and claim 45p for the first 10,000 miles and 25p per mile thereafter.

Example – say you had driven 12,000 business miles in the year.

You would claim (45p x 10,000) + (25p x 2,000) = £4,500 + £500 = £5,000.

Costs

You would total all of the costs relating to your car (insurance, road fund license, fuel, service, MOT, repairs, any finance interest, etc.) and claim a proportion of the costs based on the proportion in which you used the car personally and for business.

You would also claim a proportion of the car's purchase price every year which is dependent on the CO2 emissions of the car.

Example – you have incurred the following costs during the year:-

Fuel £3,400

RFL £100

Service £200

MOT £50

Repairs £250

Total £4,000

Say 60% of your car mileage related to business - you’d claim £4,000 x 60% = £2,400 as a business cost.

Also, say you’d purchased the car for £10,000 – you’d claim a percentage of the cost as capital allowances (usually 18%) and then proportion this depending on business mileage.

You’d therefore claim £10,000 (cost of the car) x 18% (capital allowances) x 60% (business use) = £1,080 against your profits and £10,000 - £1,800 = £8,200 would be carried forward to claim next year.

The total claim would therefore be £2,400 (costs) + £1,080 (capital allowances) = £3,480.
 

Other things to consider

I would suggest that you shouldn't use the costs method if your business is Limited Company. You will have to submit a P11D to HMRC detailing benefits in kind (BIK) every year. The BIK is ridiculously high these days (which wasn't the case in the 80's). Unless you change your business car every 1 or 2 years then it simply is not worth it.

You cannot change methods once you have started using one for a specific car.

UPDATE:

Since writing this blog, HMRC have introduced the 'limited cost business rules' which will put off most businesses. You’re classed as a ‘limited cost business’ if your goods cost less than either 2% of your turnover or £1,000 a year (if your costs are more than 2%). This means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.

ORIGINAL POST:

Usually, the amount payable to HMRC is the VAT on your sales minus the VAT on your purchases.

With the Flat Rate Scheme, you pay a fixed rate (dependent on your business activity) on your gross sales.

For Example

Say I was a management consultant (currently a fixed rate of 14%) and I made sales in one 3 month period of £10,000 + VAT = £12,000.

I would pay 14% on the gross sales figure of £12,000 to HMRC = £1,680 instead of the £2,000 I would have had to pay on the normal scheme.

The drawback is that you cannot claim VAT on your expenses (except for certain capital assets over £2,000, such as an expensive computer) – but how much in VATable expenses would a consultant have? A mobile phone and a bit of computer equipment perhaps………I wouldn’t have thought it added up to £2,000 - £1,680 = £320 per quarter in VAT.

Flat Rate Scheme Advantages

It’s much simpler to calculate a fixed percentage on your sales than to account for VAT on every sale and purchase.

You’ll receive a 1% reduction in your rate in your first year as a VAT registered business.

More often than not a business saves money on the scheme – which is always good!

Other Points

Find the rates for different business activities here: www.gov.uk/vat-flat-rate-scheme/vat-flat-rates

To join the Flat Rate Scheme your turnover must be less than £150,000 (excluding VAT) and you must leave the scheme if your turnover exceeds £230,000 (including VAT).

Don't panic...the deadline has not changed from the 31st January but there are advantages to filing your tax return early and we are not just talking about a "tax-stress" free Christmas!

If you file your tax return online by 30th December and the amount of tax you owe is less than £3,000, you can request to have the tax collected through your PAYE code (spread over the next year) rather than having to pay it as a lump sum by 31st January.

This could have considerable cash flow advantages especially if you are expecting a large credit card bill in January from all that Christmas spending!

You do need to already pay tax through PAYE and there are certain circumstances where you will not be eligible e.g. if you don't have enough PAYE income for HMRC to collect it.

Hurry though as us accountants are exceptionally busy at this time of year.

From the 6 April 2015 the marriage allowance allows for the transfer of £1,060 of a spouse's personal allowance to their partner.

The spouse transferring the additional allowance must be earning less than the personal allowance and the spouse receiving the allowance must not be paying higher rate tax.

If this is something that you can benefit from then you can register at:

www.gov.uk/marriage-allowance